Real business cycle theory is a class of theories explored first by John Muth (1961), and associated most with Robert Lucas. The idea is to study business cycles with the assumption that they were driven entirely by technology shocks rather than by monetary shocks or changes in expectations.
Parkin and Bade go on to explain: A business cycle is not a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock. Its timing is random and, to a large degress, unpredictable. A business cycle is identified as a sequence of four phases:
Take United Kindom for example,since 1980, before 1992, the British government has been beset with up to 10% inflation race. "inflation is rising and the current account of the balance of payments is moving into deficit."(Sloman, J. & Sutcliffe: 2001). Since 1992, because the government embarked on a massive programme of reform of labor market, putting up the labour productivity; the monetary policies to halt inflation have been successful, the British GDP was with an average annual growth rate of 2.5 percent. But at the same time, "In the expansion phase, growth is high and unemployment is falling."(Sloman, J. & Sutcliffe: 2001). See the following data for reference:
In the United States, the National Bureau of Economic Research, an independent research institution, determines the official dates of peaks and troughs in U.S. business cycles. The following table shows the NBER monthly dates for peaks and troughs of U.S. business cycles since 1890.( Romer, Christina D: 1986)
During deflationary period, there exists a persistent decrease in the level of consumer prices or a persistent increase in the purchasing power of money because of a reduction in av ...